MOSCOW (Reuters) - The failure of two big Russian lenders within a month has cast doubt on how much longer a phenomenon of the post-Soviet financial system, the “pocket bank”, can last.

The practice of conglomerates running their own banks grew out of the early days of Russian capitalism in the 1990s. But with authorities now purging a sector beset by bad debts, owners are trying to get rid of their remaining pocket banks and finding few willing buyers, if any.

Big businesses that emerged from the rubble of the Soviet Union set up these in-house banks to provide themselves with funding because the financial sector was so underdeveloped following seven decades of communism.

Today they make up only a handful of the top 50 Russian lenders by assets but some have extensive financial links with other banks. Where the authorities sense a risk to the wider financial system, they are stepping in.

Over the past month, the central bank has bailed out Otkritie Bank and B&N Bank, whose problems were at least partly linked to their being part of conglomerates.

A third bank, Yugra, which was part of a real estate-to-oil business empire and regarded as less of a systemic risk, had its licence withdrawn earlier this year. While savers were reimbursed by the central bank, its demise caused market concerns about the banking sector’s stability.

A financial market source, who spoke on condition of anonymity, said the spate of banks in difficulties is “a systemic issue lingering from the past when owners were lending to their own business”.

“The banking business itself is not profitable. It’s like an avalanche which is waiting to happen: there is no movement, no one is buying assets,” said the source.

REMNANT OF THE 90S

Nearly three decades after the emergence of pocket banks, it is becoming less beneficial for conglomerates to own them.

The lenders are saddled with bad debt that has been accumulating since the 2008 global economic crisis and the parent groups are in some cases struggling too. On top of this, the central bank has imposed more stringent rules on related party lending which cancel out many advantages of a pocket bank.

“There are different central bank requirements regarding additional provisions on related parties - this makes such a business model not so attractive from an economic point of view,” Deputy Finance Minister Vladimir Kolychev told Reuters in an interview last week.

Some owners have already got out, including Leonid Fedun, vice-president of oil company Lukoil, who co-owned Petrocommerce bank.

“We got rid of Petrocommerce as we did not want to deal with non-core businesses. We were step-by-step getting rid of our financial business which was a remnant of the 1990s, when it was essential to do it,” Fedun told Reuters last week.

Ironically, the buyer was Otkritie and under the deal Fedun ended up with a 4 percent stake in the group before the bailout. Fedun has turned his back on the banking business. “There is neither the desire nor the skills to return to it,” he said.

CAPITAL PRESSURE

Life became harder for the pocket banks in January when the central bank introduced new rules on related-party lending. These limit a bank’s exposure to its shareholders to 20 percent of its capital. Loans to a single borrower or group of connected borrowers are capped at 25 percent.

The more capital banks have to set aside to comply with these rules, the less scope they have for issuing loans, pressuring margins.

Vasily Pozdyshev, deputy central bank governor, described banks’ practice of lending to businesses linked to their own shareholders as the “the birth trauma of the Russian banking system”.

“We are fixing this problem,” he said. “We are going to toughen things up.”

Mikail Shishkhanov, the main shareholder in B&N Bank, said the tighter rules had contributed to the bank’s problems.

“Nobody could have supposed that the central bank would become the way it is now, that is strict and consistent,” Shishkhanov told Vedomosti business daily. The new rules, he said in an interview published this week, “have hit private Russian banks hard”.

B&N is a part of the Safmar group with over 2 trillion roubles’ ($34 billion) worth of assets ranging from oil and coal to pension funds. Shishkhanov has said that Safmar, which is controlled by his uncle’s family, will transfer some assets to B&N to cut the amount of state funds needed for the bailout.

RISKY APPROACH

Toxic property loans have been particularly problematic. Growth in real estate prices stalled after the 2008-9 global financial crisis, forcing some developers into bankruptcy. Banks took over buildings that were offered as collateral on the loans, but have struggled to sell them.

Safmar is trying to sell 900 property assets worth around $400 million, including Russia’s only completed building designed by the late celebrity architect Zaha Hadid.

Two real estate sources said the portfolio comprised assets that Safmar acquired when its businesses rescued struggling Russian banks and inherited their loan books, including physical assets that had been seized from borrowers in default.

DRAGGING ON SMALL BUSINESS

Market players say the central bank purge will generally make the sector healthier, but it is creating difficulties for some small and medium-sized business customers.

Alexander Moynov, who heads the Russian business of South Korea’s Kia Motors, said one Kia dealer is facing a liquidity shortage after it failed to secure refinancing from Otkritie before the central bank stepped in.

Moynov told Reuters some dealers could not get loans from the big state banks because they are too small, so they are turning to more aggressive private banks.

“We are feeling changes at Otkritie, not massively but some dealers are suffering. For example, there is one dealer lacking 150 million roubles.”